Gross Receipts Tax (Commerce Tax)

Thursday, October 12, 2017

In 2003, Gov. Kenny Guinn proposed a new tax instrument to be levied against the gross revenue of Nevada businesses. Lawmakers rejected the scheme in favor of the current Modified Business Tax, an excise tax on private‐sector payroll. Still, the idea has continued to have zealous supporters.

In 2011, some lawmakers proposed a modified GRT, called a business “margin tax,” that would be assessed at a rate of 0.8 percent against gross profits prior to deductions for administrative and selling expenses. The proposal gained little support, but the next year, the state AFL‐CIO and teacher union qualified a version of the proposal as a ballot initiative. That version more than doubled the rate of assessment to 2.0 percent and also changed some key legal definitions. The ballot initiative was defeated by a 4‐to‐1 margin.

Once reelected, however, Gov. Sandoval immediately reversed his public position and included a new GRT in his 2015‐2017 budget, demanding that lawmakers authorize it. Multiple versions were proposed by the administration and debated by lawmakers until a final version, called the “commerce tax,” could achieve the two‐thirds supermajority required for passage.

Key Points

The commerce tax is a GRT like all its antecedents. The tax base for the commerce tax is a firm’s gross income, the top line on its income statement. Tax liability is assessed as a percentage of this figure regardless of the firm’s costs or profitability.

Gross receipts taxes are “distortive and destructive.” The Tax Foundation calls GRTs “distortive and destructive,” because they “pyramid” up the supply chain, being assessed at every level of production. Thus, highly complex goods that require multiple stages of production are repeatedly subjected to the tax. This results in a higher effective tax rate on more complex goods, which distorts economic behavior. As the Tax Foundation says, “Gross receipts taxes do not belong in any program of tax reform.”

The commerce tax, like other GRTs, imposes high compliance costs. Every Nevada firm is required to file a commerce tax return with the state taxation department even if owners won’t be subject to the tax. This requires that they delineate all revenues earned within and without the state’s boundaries. For many Nevada businesses, the new compliance costs they must meet will be even higher than the taxes paid.

The commerce tax is more pernicious than previous incarnations. Apologists for the commerce tax argue that the currently applicable tax rates are lower than those under previous GRT proposals and that the tax contains an exemption for the first $4 million in Nevada gross receipts. However, the bill authors divided their private sector targets into 26 different categories, all with unique rates, so that future legislatures can pit one industry against another to extract higher taxes.

The biggest proponents of the commerce tax are exempt from it. Several large gaming companies have been the behind‐the‐scenes movers for imposing a GRT upon other Nevada businesses. They were able to write language into the legislation that exempts their gaming revenue and their Real Estate Investment Trusts, which these companies have used to structure their multi‐ billion dollar real‐estate holdings.

Recommendations

Repeal the commerce tax and abandon GRTs. The Tax Foundation declares, “There is no sensible case for gross receipts taxation, or modified gross receipts taxes such as a Texas‐style margin tax.” Indeed, there is broad consensus among tax economists that gross receipts taxes are more destructive than alternative tax instruments yielding similar amounts of revenue. As such, Nevada lawmakers should immediately repeal the destructive and unpopular commerce tax and never again consider a GRT in Nevada.